Theres no such thing as society. There are men and women and there are families (21) – Margaret Thatcher

All individuals share self interest (21)

Often cooperation is in our best interest (22)

Our fears are always more numerous than our dangers (24) – Seneca

It takes time to secure your reputation and we only care when we are part of a community

Mens natures are alike, its their habits that carry them far apart (33) – Confucius

Psychology of Misjudgements

Association Bias

Under estimate reward and punishment

Under estimate own self interests and incentives

Self serving bias

Self deception and denial

Consistency tendency

Deprival syndrom

Status quo / do nothing

Impatience

Envy / Jealousy

Distortion by contrast comparison

Anchoring – Bias toward initial info

Over influence by vivid or recent info

Ommission and abstract blindness

Bias from riciprocation tendency

Bias from over influence by liking

Bias from over influence of social proof

Bias from over influence of authority

Sense making

Reason respecting

Believing first and doubting later

Memory limitations

Do something

Say something

Emotional arousal

Stress confusion

Confusion from physical or psychological pain

Over influence from combination of above

Man is and always was a block-head and dillard much readier to feel and digest than to think and consider (42) – Thomas Carlyle

Evaluate things, situations and people on their own merits (43)

The iron rule of nature is you get what you reward for. If you want ants to come you put sugar on the floor (44) – Charles Munger

Goals should be taylored to the economics of the specific operating business and be simple as to be easily measured and be directly related to the daily activities of participants (48)

We are generally the better persuaded by the reasons we discover ourselves than by those given to us by others (19) – Blaise Pascal

Do not train boys to lear by force and harshness, but lead them by what amuses them so that they may better discover the bent of their minds (54) – Plato

What human enterprises need to run well: integrity, intelligence, experience and dedication (58)

Consistently not stupid, instead of intelligent

Nothing is easier than self deceit, for what each man wishes, that he also believes to be true (59) – Demosthenes

… their judgement was based more upon blind wishing than upon any sound prediction for it is a habit of mankind to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not desire (59) – Thucydides

What is wanted is not the will to believe, but the will to find out, which is the exact opposite (59) – Bertrand Russell

The difficulty lies not in the new ideas, but in escaping the old ones (60) – Kenyes

What the human being is best at doing is interpreting all new info so that their prior conclusions remain intact (61) – Buffet

The task of man is not to see what lies dimly in the distance, but to do what lies clearly at hand (62) – Carlyle

Most economists are most economical about ideas – they make the ones they learned in grad school last a lifetime (63) – Buffet

Convictions are more dangerous enemies of truth than lies (64) – Nietzsche

Men never do evil so completely and cheerfully as when they do it from religious conviction (65) – Pascal

Facts do not cease to exist because they are ignored (66) – Huxley

Mistakes are more easily detected by others, try a mirror to see in reverse (67)

To forbid us something is to make us want it (69) – Montaigne

If I hadn’t made the investment would I make it today at these prices?

We react more strongly to the concrete and specific than to the abstract

We don’t see the cost and benefits of resources alternative use

Missing info doesn’t draw our attention

When we choose we compare positive attributes, when we reject we compare negative attributes

This means that we often both choose and reject options that are more complex than average (79)

We don’t see much of what passes our eyes when focused on something else

There is no duty more indispensable than that of returning a kindness. All men distrust one forgetful of a benefit (80) – Cicero

I praised him for a job well done and received a motivated employee

We reciprocate unfair behavior even if it costs us

Gift is best if it is personal, significant and unexpected

If there is any one secret of success, it lies in the ability to get the other persons point of view ans ee things from his angle as well as from you’re own

Example is better than law (81)

The deepest principle in human nature is the craving to be appreciated (81) James

Personal beauty is a greater recommendation than any letter of introduction (82) Aristotle

He that has once done you a kindness will be more ready to do you another – Franklin

How much time he gains who does not look to see what neighbors say or does or thinks

Love your enemies, for they tell you your faults

Our enemies opinion of ourselves comes closer to the truth than our own (84) – Rochefoucauld

If 40M people say a foolish thing, it does not become a wise one (84) – Somerset Maugham

Unfortunately many people would rather be wrong in a group than right by themselves

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally (85) Kenyes

Blindly following the lead of others can have dangerous consequences

Since nobody is concerned, nothing can be wrong. Pluralistic Ignorance (86)

The masses have never thirsted after truth. They turn aside from evidence that is not to their tastes, preferring to deify error, if error suduce them. Who ever can supply them with illusions is easily their master. Who ever attempts to destroy their illusions always their victim. (87) LeBon

Madness is a rare thing in individuals, but in groups, parties, peoples and ages it is the rule (87) – Nietzsche

It is easy in the world to live after the worlds opinion; if is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keep with perfect sweetness the independence of solitude (88) Emerson

You are right because your data and reasoning are right

Remember, when all are accountable none are accountable

In questions of science, the authority of 1000 is not worth the humble reasoning of a single individual (89) – Galilei

To ensure their trustworthiness, authorities often mention weaknesses before strengths and provide info that seems contrary to their interests – also salesmen and negotiators (91)

The public have an insatiable curiosity to know everything, except what is worth knowing (91) Wilde

You can only predict things after they happen – Lonesco

No one can predict the future

We underestimate the influence of chance

Good stories and drama get our attention

Our need for making sense makes us even believe in non-sense

Five W’s for communication, who, what, where, when and why

You can not reason a man out of a position he did not reason himself into in the first place – For argument based on knowledge implies instruction and there are people whom one cannot instruct (95) – Aristotle

Studies show that in order to understand some information we must first accept it as true

The more distracted or pressured, the more likely we are to believe

When dealing with important issues, think things through and avoid distractions

Seven sins of memory

Lose over time

Lack of focused attention

Information block

Assign to wrong sources

Implanted by leading

Present knowledge influences past

Remember what we prefer to forget

The more confident, the more believable

Keep records of important events

I’ve often said that the sole cause of unhappiness is that he does not know how to sit quietly in his room (99) Pascal

Don’t confuse activity with results

Wise men talk because they have something to say, fools because they have to say something – Plato

Once a day, call yourself to account what new ideas, new propositions, or new truths you have gained. What further confirmation of known truths and what advances you have made in any part of knowledge – Isaac Watts – Improvement of the Mind

Awareness of ignorance is the beginnings of wisdom

We automatically judge how good or bad a stimulus is based on how we feel about it (101)

We long for what we don’t have until we get it, then we long for something else

Is there a rational reason behind my decision?

A wise man controls his temper. He knows that anger causes mistakes

You can’t choose your cards, but you can choose how you play them (103)

Some things are in our control, some are not. Only when you learn to know the difference can you achieve inner tranquility and outer effectiveness

I’ve suffered a great many catastrophes in my live, but most of them never happened (105) – Twain

When you get two or three of these operating together, then you really get irrationality on a tremendous scale (105) – Munger

Directors should be independent, business savy, shareholder orientation, and a genuine interest in the company

No man was fit to hold office who wasn’t perfectly willing to leave it at any time – Munger

No error in thinking about social facts is more serious than failure to see their place and function – things have to be understood in their setting (108) – Solomon Asch

I shouldn’t have been so fast in judging him, I may have done the same thing in his place

How often misused words generate misleading thoughts – Spenser

If time passes before a decision, then pick to go first. If a decision right after then go last

We often don’t see what we don’t expect to see

Get so you can handle mistakes (112)

What are the factors that really govern the interests involved – What are the subconscious influences

You have to pay special attention to combinatorial effects

He who knows men is clever, He who knows himself has insight, He who conquers men has force, He who conquers himself is truly strong (113) Lao Tzu

Assiduity – sit down on your as until you’ve done it – Munger

Systems Thinking

Every action has consequences, both intended and unintended

Bad logicians have commit more involuntary crimes than bad men have done intentionally (121) – duPont

Systems adjust in response to feedback

Factors that decide final outcome of negotiations

Number of Participants

If we meet the participants again in the future

the time lapse between

the degree of anonymity and communication

our relative position of strength, including options and alternatives

BATNA – Best alternative to negotiated agreement

When you “win” an auction you’ve won the right to pay what no one else was willing to

Are you sure your intervention isn’t doing more harm than good?

To convert a model into quantitative formula is to destroy its usefulness as an instrument of thought (127) – Kenyes

This is because history never repeats itself; nothing in human society .. ever happens twice under exactly the same conditions or in exactly the same way (127) – Richard Evans

The right to search for the truth implies also a duty, one must not conceal any part of what one has recognized to be true (128) – Einstien

Scale and Limits

Changes in size or time influences form function and behavior

Surface area increases at square of length and volume at the cube of length

Up to 130 people per colony and system can be managed by the force of shame. Above this an appeal to conscience loses its effectiveness and individuals begin to need more than they contribute

How do we allocate our time, money, resources? Can we identify a few things that really matter?

When trying to improve a system, first find the systems key constraints – then try to strengthen the weakest link – watch out for other effects – wanted or unwanted

Causes

Define the key factors that determine the outcome

What is the equation that accomplishes the goal we want to achieve

Take away the cause and the effect ceases (136) – Cervantes

We attribute an outcome to a single cause when there are multiple causes (137)

Correlation means a relationship or association between two or more variables. We tend to (mistakenly) assume that when two things happen together, that one causes the other (137)

Put a statement into the right perspective (138) – Paulos

Ask – what else can explain this outcome?

There is nothing more deceptive than an abvious fact (138) – Holmes

Obviousness is always the enemy to correctness – Russell

Armor planes where there are no bullet holes because ones that returned could survive their bullet holes, but others could not

Don’t draw conclusions from what may have been a unique or random event

A number has only a size in relation to another number (141)

Numbers and their Meaning

Not everything that counts can be counted, and not everything that can be counted counts

Money has a price and that price is interest (143)

Probabilities

Probability is the very guide of life (144) – Cicero

We must make sure that the conditions that produced the relative frequency can be expected to be pretty much the same before we can use it as a guide for the future

The more representative background data or evidence we have the better our estimate of the probablity

Ask – What was my original reason for doing something? What did I know / what were my assumptions? What were my alternatives at the time?

How did reality work out relative to my original guess? What worked, what didn’t?

Given the info available, should I have been able to predict what happened?

What worked well?What should I do differently? What did I fail to do? What did I miss? What must I learn? What must I stop doing?

Basic Math

Basic Horse Sense

Basic Fear

Basic Diagnosis of Human Nature

Making Possible predictions about Human nature

Guidelines to Better Thinking

The general who wins a battle makes many calculations in his temple before the battle is fought (189) – Sun Tzu

Educated men are superior to uneducated men as the living are to the dead – Aristotle

Is there anything I can do to make my whole life and my whole mental process work better? – Munger

People on average act out of self interest

The models that come from science and engineering are the most reliable models on this earth

And what is knowledge if we don’t use it?

Those who love wisdom must be inquirers into many things indeed (191) – Heraclitus

If you don’t have a full repertoire of models, you’ll end up using the same ones even when they are inappropriate

Synthesis – to put together

The idea of scaling from mathematics, systems and constraints from physics and competitive advantage from microeconomics often explain how business value is created or destroyed

He is a benefactor of mankind who contracts the great rules of life into short sentences, that may be easily impressed on the memory, and so recur habitually to the mind – Samuel Johnson

We get what we reward for

Energy is neither created or destroyed – only changed from one form to another (193)

I forget what I hear, I remember what I see, I know what I do – Chinese Proverb

And what is needed to change an objects motion? Force

If we increase mass, we have to add more force to produce the same rate of acceleration

The mass of an object increases as its speed reaches the speed of light

There are no foolish questions and no man becomes a fool until he stops asking questions (197) – Steinetz

Just as iron rusts from disuse, stagnant water putrefies, or when cold turns to ice, so our intellect wastes unless we keep it in use – Davinci

People that use their brains don’t lose them

Meaning

Bad terminology is the enemy of good thinking

Words or names don’t constitute knowledge

Take apart a toy and see how it works

For lesson #1, to learn the mystic formula is a very bad thing!

Understanding “Meaning” requires that we observe and ask basic questions

Meaning of Words

Meaning of an event

Causes

Implications

Purpose

Reason

Usefulness

If you can’t explain it simply, you don’t understand it well enough (200) – Einstein

What determines our return? The price we pay, how much money we get back, and when we get it back

The larger the difference between an economic assets value and the price we pay, the higher our yearly return becomes

We use the risk free rate merely to equate one item to another. In other words we’re looking for whatever is the most attractive

I conceive that great part of the miseries of mankind are brought upon them by the false estimates they have made of the value of things, and by their giving too much for their wistles (201) – Franklin

The height of ability consists in a thorough knowledge of the true value of things – Rochefaucauld’s Maxim

What is the future cash we can take out and when does it appear

Price paid and the discounted value of the cash that can be taken out during the assets remaining life

Don’t trust EBITA or Pro Forma

Therefore we must say that a stock derives its value from its dividends

Growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years

People are responsible because they know there is no excuse (navy rule) (230) – Munger

Quantification

Return on invested capital makes a difference in value

V = Cash Flow / (Discount Rate – Growth Rate)

Business X

Business Y

Invested Capital

100

40

Free Cash Flow

10

10

Reinvested Capital

-5

-2

Return on Reinvested Capital

10%

25%

Cash available for distribution

5

8

Value at 10% discount rate

100 (5 / (0.1 – 0.05))

160

The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return

Ask – How much additional capital was required to produce the additional earnings?

Return on beginning equity capital is the most appropriate measure of single year managerial performance (232) – Buffet

If a business earns 18% over a 20 – 30 year period, even if you pay an expensive price you will do fine

Managers who always promise to “make the numbers” will at some point be tempted to make up the numbers

Business value is a function of the amount and timing of future cash flows

Subtract debt from price paid when valuing a company – assume you acquire a debt free business (234)

Only in fairy tails are emperors told they are naked

Market Cap

1B

Earnings

40M

Growth Rate

10% for 10 years

Market Cap (yr 10)

1.56B (15 times multiple)

Earnings (yr 10)

104M

Return

4.5%

FV = PV * ( 1 + i) ^ t

CAGR = (V at tn / V at t0) ^ (1 / tn – t0) – 1

PV = FV / (1 + i) ^ t

VAlue is destroyed, not created, by any business that loses money over its lifetime no matter how high its interim valuation

Evidence

There are in fact two things, science and opinion, the former begets knowledge, the later ignorance – Hippocrates

Strive for objectivity

Science is the great antidote to the poison of enthusiasm and superstition

Study the past if you would devine the future (240) – Confucius

Look for evidence that disproves your explanation

Constantly take your own assumptions and try to disprove them

Avoid what causes the opposite of what you want to achieve

What to do to ruin a company:

Treat the employees badly. Reward bad work. Don’t appeal to the employee’s self interest but to a goal no one understands. Don’t inform people what the company stands for, what rules apply, and the consequences for breaking them. Make sure people don’t know their areas of responsibility. Put the right person in the wrong place. Don’t let people know if they achieve a goal. Everything should be impossible to measure. Never tell people why something should be done.

Surround the CEO with confused, unmotivated subordinates. Give key customers a reason to be angry. Late and wrong deliveries, delays, and arrogance will help. Let customers associate the business with misery and make sure that this feeling gets reinforced at every contact with the company

What didn’t I want to achieve?

When we tell people what to avoid, we should end with what we want them to achieve

Begin with the end in mind

Practice zero based thinking – start with a clean sheet of paper and ask – If we weren’t already doing what we do, how can we best achieve our goal? (247)

He only did 8 things in his life. It takes a lot of judgement, a lot of discipline and an absence of hyperactivity. By this method, I think most intelligent people can take a lot of risk out of life

We try to arrange our affairs so that no matter what happens, we’ll never have to go back to go

Do the best you can do. Never tell a lie. If you say your going to do it, get it done. Nobody gives a shit about an excuse. Leave for a meeting early. Don’t be late, but if you are late, just apologize. REturn your calls quickly. The other thing is the 5 second no. You’ve got to make up your mind, don’t leave people hanging.

Attitudes

Be happy while you’re living, for you are a long time dead

Do we do what we want to do or what others expect of us?

To know what we know and what we do not know, that is true knowledge

If we don’t stand for something, we fall for anything

Honesty is the first chapter of the book of wisdom

Wealth is a blessing to those who know how to use it and a curse to those who don’t

The only way to be loved is to be lovable, you always get back more than you give away. If you don’t give any you won’t get any

Blessed is he that expects nothing, for he shall never be disappointed (257) – Franklin

The superior man does not waste himself on what is distant, on what is absent. He stands in the here and now, in the real situation

Curiosity is one of the permanent and certain characteristics of a vigorous mind – Johnson

I confess I have been blind as a mole, but is better to learn wisdom late than never at all (258) – Holmes

A bit of wisdom…

Never let your sense of morals get in the way of doing what's right.
— Isaac Asimov